How to make a family budget

Budgeting is like dieting: You can’t escape the feelings of deprivation and restriction, but you do it anyway because you know it’s good for you. In both cases, it’s tough to find the formula that’s right, and tougher still to stay on track. So we asked financial planning pros from across Canada for their advice on how to plan a family budget, stay motivated and reach your financial goals .

STEP 1: Know what you spend

You can’t create a budget until you know where your money is going. While most of us are sure about the biggies, like mortgage payments and utilities, we tend to guesstimate what we spend on variable and discretionary items like groceries and clothing, says Laurie Campbell, CEO of Credit Canada Debt Solutions, a debt-counselling service. e actual amount is o en higher than we think — in some cases, even double.

To find out the true numbers, keep track of every purchase you make for 30 days. Don’t forget small items like gum or filling the parking meter. You could carry a small notebook and jot down purchases as you make them, or save all your receipts and record the numbers in a basic spreadsheet, an online tool like mint.com . or in an app like iReconcile or MoneyBook. To make keeping track easier, Jim Yih, a fee-only financial adviser in Edmonton, suggests using only one form of payment — whether it’s cash, debit or credit card. (He recommends credit cards only for people who have no trouble paying off all their bills each month.)

Once you’ve kept track for a month, divvy all your expenses into specific categories, such as entertainment, transportation and child care. Add up totals for each category, and then add together each of those for your grand total. Then subtract that amount from your monthly take-home pay. If you spend more than you make, you’d definitely benefit from a budget.

STEP 2: Set goals

While some people get all the motivation they need from watching their bank accounts grow, most of us need a more concrete reason to stick to a budget. So set some goals for your money. Think about what would make you feel great, financially: It could be repaying your line of credit or saving $2,500 a year toward your son’s postsecondary education. Set a secondary goal for something fun, like Lina and Steven Zussino did. Last October, the Victoria couple started saving $450 a month for a trip to Venice with their five-month-old daughter. “What could be more motivating than something like that?” says Lina. They’ll be making the trip next month.

To remind you of your goals, Campbell recommends writing them on a piece of paper, then taping it to your fridge, so you see them every day. From the get-go, involve the whole family in the decision-making process. Children as young as seven can join in discussions about saving and may have some ideas of their own.

Bottom line: If all your family members buy into the goal, you’ll be more likely to achieve it. “When only one person has a budget goal, that’s where you see one spouse out spending while the other is trying to save money,” Campbell says.

STEP 3: Create the budget

Now comes the hardest part, especially if you’ve been spending more than you earn every month: figuring out which spending habits you need to change, so that you can save more money.

First, realize that budgeting isn’t a board game with one rigid set of rules for everybody. It is all about choices — what you can live with (and without!) to stay on target. “One family might prioritize organic food, which means new toys for the kids every week or Starbucks every day can’t be priorities, too,” explains Stephanie Holmes-Winton, a financial planner in Halifax. “If everything is a priori ty, nothing is a priority .”

The Zussinos’ budget, for instance, has a heavy emphasis on groceries, but they couldn’t care less about home electronics. “We don’t see a

need for a big screen TV when we live blocks from the beach and prefer to go out for a family walk in our spare time,” says Lina.

The Zussinos also strive to earn additional money by turning hobbies into income. A gym rat, Lina used to spend $720 a year on a fitness-club membership. She now teaches a class and, in exchange, gets that same membership for free. They’ve also turned their passion for bargain shopping into groceryalerts.ca . a blog they run in their spare time. Three and a half years later, the site now attracts advertising dollars — enough to make a dent in their Venice vacation fund.

A look through your spending log will help you identify the areas where you spend most, and help you see where there’s room to cut back and save. If that sounds too loosey-goosey for you, consider what Yih calls “a disciplined spending plan.” You divide your money into four quadrants: spending, saving (for emergencies), sharing (charities) and investing (for the future, be it retirement or your kids’ education). Let’s say you decide to allocate 80% of your income toward spending, 5% toward saving, 5% toward sharing, and 10% toward investing. Your predetermined ratio would apply to any money that comes in, whether it’s your regular paycheque, a bonus or inheritance. “ This really helps people to avoid winging it,” Yih says.

STEP 4: Monitor your progress

Review your budget each month to find out how well it’s working. The Zussinos treat their budget similar to a business plan, revisiting all expenses each month to see if anything can be tweaked further. For instance, Lina loved special drinks from co ffee houses to the tune of $100 a month. She wasn’t comfortable with spending so much on co ffee, so she learned how to make the drinks at home. They also decided to increase their car insurance deductible (the amount they’ll have to pay out of pocket if they make a claim), saving another $150 per year.

Making adjustments is a normal part of the budgeting process. Stay motivated by celebrating small successes, like the fact that you were able to save something, even if it’s just $5 more than you did before the budget was in e ffect. As Holmes-Winton says, “the point is that you are learning to limit your spending.”

NEXT STEPS: Investing 101

If you already have a handle on basic savings, consider starting an investment portfolio. For first-time investors, financial adviser Jim Yih recommends:

Make an appointment at the financial institution where you keep your main chequing and savings accounts. You’ll be asked to fill out a risk profile questionnaire to determine what type of investor you are.

Based on your answers, you’ll be placed into one of five categories: conservative, moderate, balanced, growth or aggressive investor. These categories will all clearly outline what portion of your portfolio should be equities (stocks and mutual funds that hold baskets of stocks), fixed income (such as GICs) and cash. For example, an aggressive investor likely has all her holdings in higher-risk equities, while a moderate investor’s holdings are more equally divided between equities, lower-risk fixed income and cash.

While you won’t have to pay a fee to the financial adviser at your bank for this service, keep in mind that you will pay fees through what’s called the “management expense ratio” of any mutual funds you buy through your adviser. The fees are split among the mutual fund company and the advisers who sell the funds. Some mutual funds charge as much as 2.5%, which can eat into any investment gains, so make sure to ask about fees before you buy.

If you’d prefer a more hands-on approach to investing at a lower cost, check out the Couch Potato strategy for tips (canadiancouchpotato.com). The plan uses low-cost index funds and exchange-traded funds.

A version of this article appeared in our November 2012 issue with the headline “Making a budget,” p. 74.